ECONOMICS WORKING PAPERS Making Money by Giving It for Free: Radiohead’s Pre-release Strategy for In Rainbows Marc Bourreau, Pinar Doğan, and Sounman Hong Paper Number 103 June 2014 © 2014 by Marc Bourreau, Pinar Doğan, and Sounman Hong. All rights reserved. Makingmoneybygivingitforfree: Radiohead’s pre-release strategy for In Rainbows∗ Marc Bourreau†,Pınar Dogan˘ ‡, and Sounman Hong§ June 2014 Abstract In 2007 a prominent British alternative-rock band, Radiohead, pre-released its album In Rainbows online, and asked their fans to "pick-their-own-price" (PYOP) for the digital down- load. The offer was available for three months, after which the band released and commercialized the album, both digitally and in CD. In this paper, we use weekly music sales data in the US between 2004-2012 to examine the effect of Radiohead’s unorthodox strategy on the band’s al- bum sales. We find that Radiohead’s PYOP offer had no effect on the subsequent CD sales. Interestingly, it yielded higher digital album sales compared to a traditional release. Our find- ings suggest the PYOP strategy generated higher sales revenues overall, even if one assumes no revenues were obtained directly from the PYOP channel. However, this “success story” does not readily apply to similar strategies adopted by other bands. We show that Nine Inch Nail’s ∗We thank Eric Avenel, Jorg Claussen, Sylvain Dejean, Ting Li, François Moreau, Martin Peitz, Thierry Pénard, Dani Rodrik, and Joel Waldfogel for useful remarks. We also thank participants at the 11th ZEW ICT Conference (Mannheim, 2013) and seminar participants at the University of Rennes and the Université of Paris-Sceaux for their comments. Pınar Dogan˘ thanks the Blavatnik School of Government at University of Oxford for its hospitality during the final stages of writing this paper. Marc Bourreau acknowledges financial support by Agence Nationale de la Recherche under Grant No. ANR-08-CORD-018. †Telecom ParisTech, Department of Economics and Social Sciences, and CREST-LEI, Paris. Email: [email protected]. ‡John F. Kennedy School of Government, Harvard University, Cambridge, MA, and Visitor at the Institute for Advanced Study, Princeton, NJ (AY 2013-15). E-mail: [email protected] §College of Social Sciences,Yonsei University, Seoul, Republic of Korea. E-mail: [email protected]. 1 free provision of its new album, The Slip, resulted in lower revenues from the album’s digital sales. Keywords: Pick-your-own-price; Music industry; Cannibalization; Market expansion. JEL Codes: L82. 2 "The final acid test is come January, when the music has been available. Will there still be sufficient demand for a CD for us to feel that we’ve proved that making music available does not necessarily cannibalize CD sales?" Bryce Edge (Radiohead’s Manager), 11 October 20071 1Introduction On September 30, 2007 when world-wide fans of Radiohead visited the band’s web site to pre- order their new album In Rainbows, they were asked to name their own price for it. Along with the "pick your own price" (PYOP) offer for the digital download, the band offered a "deluxe box set" at a preset price.2 The PYOP offer came to an end on December 10, 2007, and the album (in digital and physical forms) was released and commercialized subsequently, in January 2008.3 Radiohead’s strategy received considerable media coverage, and within six months it became a topic for a Harvard Business School Case Study.4 The strategy also inspired other artists as well as information good providers.5 In Rainbows was downloaded in places as far-flung as North Korea and Afghanistan6 and with very few listeners trying to buy for a penny.7 This is in accordance with the literature on the PYOP models, which suggest that people do not necessarily free-ride when they are asked to pick and pay their own price.8 It is argued that this is because in addition to the intrinsic value obtained from consuming a particular product, purchasers may obtain a warm glow from doing business with the given firm.9 The number of people who downloaded In Rainbows through the band’s web site, as 1 "In Radiohead Price Plan, Some See a Movement," New York Times, October 11, 2007. 2 One of the authors of this paper was puzzled with the PYOP offer. While her rational-economist-self dictated that she must pay the minimum service charge to download the digital album, her emotional-Radiohead-rabid-self revolted immediately, and she ended up preordering the deluxe CD at the preset price. 3 Radiohead self-produced and self-released In Rainbows after their contract ended with EMI. See Morrow (2009) for a detailed account of the release strategy of In Rainbows. 4 See Elberse and Bergman (2008). 5 For example, British pop star Sir Cliff Richard followed the footsteps of Radiohead and announced that he would ask his fans to name their price for the digital download of his new album, Love, The Album. Also, shortly after Radiohead’s offer, PASTE magazine asked its subscribers to pay what they like for a year’s subscription of the magazine. See Fernandez and Nahata (2009) for examples of PYOP offers in the context of non-information goods such as restaurant services. 6 See Pareles (2007b). 7 See Morrow (2009), who quotes Murray Chalmers, a spokesperson for the band on this. 8 See Fernandez and Nahata (2009), who set up a theoretical model of consumer behavior and show that when the product provides a positive value all consumers, free riding is never an equilibrium. 9 See for example, Isaac et al. (2010); the warm glow may be obtained due to group identity, charitable support, and existence support. Existence support emerges due to customers desire for the continued existence of the firm (for example, due to valuation for future consumption possibilities). 3 well as the average price paid for it remains a mystery. However, according to the band’s lead singer Thom Yorke, Radiohead has profited from the PYOP release strategy, making more money from digital downloads of In Rainbows than from digital downloads of all their other studio albums.10 In this paper we study whether the PYOP offer of In Rainbows hurt Radiohead’s subsequent album sales, that is, whether this innovative strategy passed the final acid test, as put by the band’s manager. The digital download of In Rainbows through the PYOP offer is a very close—if not a perfect—substitute to the digital album sold through the digital distribution channels (DDC) like iTunes, Amazon, etc., and therefore, the former might have reduced the sales of the latter. To the extent that there is some degree of substitution between the digital download and the CD of the same album, a cannibalization effect might have occurred also on the sales through the physical distribution channels (PDC) of In Rainbows. At the same time, as Radiohead presumably received a much larger media coverage with this innovative strategy than what they would have received with a traditional release, the PYOP offer might have lead to higher sales for In Rainbows through all channels. In addition, the attention received by the PYOP offer might have generated positive spillovers to Radiohead’s earlier albums. As Hendricks and Sorensen (2009) show in their seminal paper, a release of a new album can create a backward spillover effect, i.e., increase the artist’s old album sales substantially, which may result from consumers discovering the artist upon hearing the new release. Although Radiohead is a well-established band, with six studio albums prior to In Rainbows, such spillovers might still exist, and might have been amplified with the additional media attention the PYOP strategy received. In short, while the PYOP offer might have cannibalized the sales of In Rainbows through the DDC and the PDC, at the same time it might have expanded the market both for In Rainbows and for Radiohead’s earlier albums. Therefore, the net effect of the PYOP offer on Radiohead’s album sales depends on the magnitude of these opposing forces. Our paper is tangential to the literature on PYOP, as we are not studying consumers’ behavior in picking a price (or the revenues directly generated with the PYOP offer),11 but the effect of 10This may be partly due to the fact that the band did not receive much from the digital sales, as those rev- enues were captured by the recording company. See http://www.wired.com/entertainment/music/magazine/16- 01/ff_yorke?currentPage=all. Similarly, Radiohead’s publisher, Warner Chappell noted that "In Rainbows made more money before the album was physically released than the total sales for the band’s previous album, Hail to the Thief." Subsequently in 2009, In Rainbows received the Grammy Award for Best Alternative Music Album. 11For a study with a focus on consumers’ payment behavior facing PYOP offers, see Regner and Barria (2009), who analyze the payment behavior for the online music label Magnatune, where consumers were allowed to pay the price they picked, within a given range ($5-$18). See Gneezy et al. (2010) and (2012), for field experiments on PYOP strategies that analyze various behavioral concerns such as identity, self-image, and social responsibility. 4 the PYOP offer on the sales obtained through other legitimate channels.12 Our paper is more closely related to the literature that studies the interaction between different channels through which a particular information good can be consumed, as with its PYOP offer for In Rainbows, Radiohead has effectively created an alternative (and temporary) channel of sales for its album. A relatively large set of studies has studied the effect of piracy on the sales through legitimate channels.13 Focusing on the music industry, Waldfogel (2010a) looked at this relationship the other way around, and examined the effect of the introduction of legitimate and widely used digital channels (like iTunes) on unpaid consumption of music, as well as on the rate of displacement of paid by unpaid consumption.